Many workers are tapping their retirement funds for emergencies for one simple reason: They don’t have an emergency fund. Nearly one in three Americans has no emergency savings at all, according to a survey released by Bankrate this year — the highest rate in the five years Bankrate has been doing the survey. What’s more, fewer than one in four has more than six months of income (that’s what many experts consider an ideal amount of emergency savings) in their emergency fund.

“Americans are woefully under-saved for emergencies — and lacking that cushion, they far too often resort to [tapping] their retirement accounts,” says Greg McBride, the chief financial analyst for Bankrate.com.

Add to that the fact that it’s highly likely you’ll experience an emergency or at least an unforeseen expense in a given year — a survey released last year by American Express found that this happens to nearly half of Americans — and you can see why so many people are dipping into the retirement well.

It’s older people who are most likely to tap into their retirement savings for emergencies. McBride says that this may have to do with higher medical bills or persistent underemployment, among other reasons, but that whatever the reason, it’s “particularly troubling.”

“These are the years when they should be putting the hammer down to boost savings,” he says.

Older people are more likely to tap retirement savings for emergencies

Age group

% who tapped retirement savings for emergencies

18-29

8%

30-49

12%

50-64

17%

65+

19%

Source: Bankrate.com

The high cost of tapping your retirement funds Taking an early withdrawal from your 401(k) will cost you, because not only will you have to pay income tax on the total amount of money withdrawn, you’ll also typically incur an early-withdrawal penalty of 10%. This means that, if you withdraw $10,000 and you’re in the 25% tax bracket, you’ll end up paying $3,500 ($2,500 for income taxes and $1,000 in penalties) in taxes and penalties — and thus netting just $6,500.

Plus, 401(k) loans are risky in that if you leave your job or are laid off, you typically only have about 60 days to repay the entirety of that 401(k) loan — or risk it being treated as a withdrawal, which incurs income tax and early-withdrawal penalties. (Roughly one in 10 people who took a 401(k) loan could not repay it, research shows.) You also repay your loan with after-tax dollars, meaning that someone in the 25% tax bracket would need to earn $12,500 to pay back a $10,000 loan.

Furthermore, with both withdrawals and loans, the total cost of the taxes, penalties and fees may pale in comparison to the money you might lose out on from not being invested in the market, which can easily escalate into thousands, even tens of thousands, in lost monies.

America’s vast retirement savings shortfall These ill-advised, costly money moves are further exacerbated by the fact that Americans are already vastly under-saved for retirement. Only about two in three workers have saved any money for retirement, according to a 2015 report from the Employee Benefit Research Institute.

And of those that have saved, for some, the amounts are paltry: Just 14% of American households say the value of their savings and investments (minus their primary home value) are more than $250,000 — and experts say most households will need more than $1 million to retire comfortably. (Incidentally, just 10% of workers think they’ll need more than $1 million to retire comfortably, according to EBRI.)

Most workers don’t have enough money to retire

Total savings and investments, 2015

Less than $1,000

28%

$1,000 - $9,999

17%

$10,000 - $24,999

12%

$25,000 - $49,999

9%

$50,000 - $99,999

10%

$100,000 - $249,999

10%

$250,000 or more

14%

Source: Employee Benefit Research Institute

Catey
Hill

Catey Hill covers personal finance and travel for MarketWatch in New York. Follow her on Twitter @CateyHill.

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